EconomistMom.com
…because I’m an economist and a mom–that’s why!

EconomistMom.com

(Fiscal) New Year’s Resolutions

October 4th, 2010 . by economistmom

As my boss, Bob Bixby, notes, we’ve just started a new fiscal year (FY2011) last Friday, but we didn’t exactly get to “party like it’s 2010″ (when expensive policies are scheduled to expire).  Seriously, a few years ago I had a lot of faith that we would have enacted some meaningful reforms by now, especially on the tax side given the “action forcing event” of the scheduled expiration of the Bush tax cuts.  But “change” has been minimal on the fiscal policy front, even with changes in who’s in charge.

Bob came up with this great list of (fiscal) New Year’s Resolutions, Concord Coalition-style:

[I]t seems like a good time to make some New Year’s resolutions. Here are a few suggestions:

  • First, the President’s bipartisan fiscal commission should resolve to overcome partisan differences and produce a plan for long-term deficit reduction.
  • Second, the President should resolve to make deficit reduction the main focus of his Fiscal Year 2012 budget, allowing for a phase-in period as the economy recovers.
  • Third, Congress should resolve to pass a budget resolution next year, something it failed to do this year. And that resolution should contain a realistic strategy for reducing the deficit, including discretionary spending cuts, phased-in entitlement reforms, revenue increases and an enforcement mechanism to back it up.
  • Fourth, the media and the public should resolve to keep the pressure on politicians to produce solutions that add up. No more “fuzzy math” evasions should be tolerated on the campaign trail or in the halls of Congress.
  • And finally, the public must resolve to accept that sacrifices will be required to ensure a more prosperous future. Don’t blame the politicians for failing to make responsible choices if they are only rewarded at the polls for making irresponsible promises.

If these resolutions are made and met, we might have more reason to cheer when the next fiscal new year comes around.

24 Responses to “(Fiscal) New Year’s Resolutions”

  1. comment number 1 by: BillSmith

    Alas, given the record of promises made in Washington, no trust in a ‘phase-in’ period.

  2. comment number 2 by: AMTbuff

    I would absolutely vote for tax increases triggered only when actual spending (not the projections in the budget, but prior year outlays) falls below targeted percentages of GDP. That would reward Congress for keeping spending down. It’s the performance bonus model.

    Trouble is, Congress can and will break its promises. They always do. In my opinion, every retroactive tax increase is a broken promise.

  3. comment number 3 by: SteveinCH

    Yeah, it’s kind of like the whole SS thing where people go on and on about government keeping its promises to pay benefits while never worrying about keeping its promises about how much is would take from us in order to pay the benefits.

  4. comment number 4 by: AMTbuff

    >Yeah, it’s kind of like the whole SS thing where people go on and on about government keeping its promises to pay benefits while never worrying about keeping its promises about how much is would take from us in order to pay the benefits.

    And those paying for the promises are our children. This is why the unsustainable promises have been called inter-generational theft. It needs to be reversed by explicitly breaking the benefit promises.

  5. comment number 5 by: Arne

    I’m not retired yet, so my children are not paying for my benefits (yet). I am paying for my parents benefits. They paid for a lot of stuff for me while I was growing up. I have no complaints about paying for them now.

  6. comment number 6 by: Gipper

    Arne,

    Such a noble vision of charity. Except that you’re not paying the entire bill for your own parents. Every other taxpayer is chipping in a contribution. Your parents didn’t get me anything while I was growing up so why ask me to pitch in?

  7. comment number 7 by: Arne

    Gipper, you are wrong.

    Assuming that my parents live an average lifetime after retirement (I selfishly hope for much more), I will more than pay for their SS benefits over my working career.

    On top of that, many other members of society have contributed to my success. It really is not a zero-sum game. Pooling resources to provide a safety net for all makes actually works.

    Healthcare is where I see the issue. It is too easy to provide services that are not worth it.

  8. comment number 8 by: Gipper

    Arne,

    That’s the theory. However, if you were to die today or lose your renumerative employment, then your claim would be false.

    Where does the zero-sum game comment come from? There’s no zero-sum game involved in voluntary exchange in a free market. The zero sum game comes with redistributive government policies.

  9. comment number 9 by: SteveinCH

    Hey Arne, can you show your math for the class. I think you’re wrong but if you’ve done the math, I’d love to see it.

  10. comment number 10 by: Arne

    Retiring in 1993 my with a 26 percent replacement rate on a max salary, my father gets $13.2K per year in 1993 dollars. Multply by 19 years, that is $252K (1993 dollars). For simplicity ignore the years I worked before 1993 since I did not make the max yet. Assume COLA is 2.0 and AWI is 3.5 percent in the future to calculate my future taxes. Adjust the taxes I paid each year to 1993 dollars and you get $296K. I more than pay for my father’s benefits.

  11. comment number 11 by: SteveinCH

    But you said your parents. I pretty much thought it was plural ; )

  12. comment number 12 by: Arne

    My mom stayed at home. I don’t have the info to do the math. Can’t calculate survivor’s benefits since they are both still alive.

  13. comment number 13 by: Arne

    Paying for services for others is not a zero sum game. The gain to others does not equal the cost to you. The education I got at taxpayer expense was a key component of my ability to earn what I do. In turn, I both live a more comfortable life and pay more in taxes to support the next generation.

  14. comment number 14 by: Vivian Darkbloom

    The only thing Arne had to reveal in order to demonstrate the truth of his math is that he is paying the maximum contribution to Social Security. Social Security is highly progressive (see Social Security reports on this topic and studies by Andrew Biggs in particular) , so a person making maximum lifetime contributions easily pays for a current average retiree, and then some. Arne makes a big assumption, though, in concluding that he will always pay the maximum and that his father won’t live until he is 120. Let’s hope he does, but the point is that one’s contributions are not earmarked to one’s parents. Social security contributions are fungible, such that we could easily say Arne’s contributions are subsidizing someone else’s parents who paid the minimum for 40 quarters, so it makes little practical sense to talk about one’s parents.

    As far as “keeping promises” is concerned, the government can never keep its promises with respect to contributions or benefits so long as the Social Security system is based on a defined benefit plan that is funded by defined contributions and it should not pretend that it will keep those promises under such a system. A sensible reform might change this by calculating the balance of the trust fund each year and the actuarial need (basically what private funds must do) and then adjusting not only contributions but also benefits each year based on the revised actuarial calculation. It defies common sense to think that government should not be required to follow the same accounting as private funds. Because both contributions and benefits would be adjusted annually (say on a 50/50 or other pre-determined formula) it would be a hybrid defined benefit and defined contribution plan (what we currently have now but pretend we don’t) such that cost and risk is shared inter-generationally. Annual changes should not be dramatic but such a system would ensure that we are always more or less on course. Calculating rate of return would be based on government borrowing costs (blended Treasury rates) which should be much more stable than private estimates based largely on equity market returns). This is actually the system we’ve got now, except that the adjustments are made much less frequently and the cost sharing is based on intermittent political haggling rather than a social compact.

  15. comment number 15 by: BillSmith

    If you look at how the rates on the Treasury Bonds that are in Social Security Trust fund are determined and then look at the term structure of those bonds in the Trust Fund you will see that the Treasury is paying Social Security higher than market rates and that causes anyone that pays into the Treasury excise/income/inheritance?/ etc. tax to be subsiding Social Security to some point.

  16. comment number 16 by: Gipper

    The biggest problem with Arne’s math is that he forgets about interest rates, present values, and inflation when he conducts his analysis.

    Darkbloom, the easier solution is to convert SS into a defined contribution plan instead of a defined benefit plan.

    Have individual accounts in a Treasury Mutual fund. An individual’s SS contributions purchase shares in the mutual fund comprised of a basket of US Treasuries. It won’t change the revenue and expense cash flow of the federal government. It will provide an open and honest accounting of our liabilities to future recipients by converting fuzzy notions of a Trust Fund and SS liabilities into the very hard and real publicly held debt.

    It will also mean that stealth SS progressivity ends because your retirement benefits are based on your contributions.

    The way to reintroduce progressivity more openly is to simply tax withdrawals from this SS Treasury mutual fund as ordinary income.

    Honesty, openness and fiscal control. Any objections?

  17. comment number 17 by: Vivian Darkbloom

    Gipper,

    I don’t have any problem with a system under which people fund their own retirements via social security. However, as I think you know, that is not going to happen because of the politics involved. Your solution, while appealing on its face, merely pushes the problem from social security to a general revenue program. The progressivity entailed in fully taxing social security benefits must find its way back into some other yet-to-be-defined welfare system. Many people in the system (now and in the future) will never contribute enough to keep them out from under bridges and, as fiscally conservative as I am, we need to deal with that. So, I think you’ve cosmetically solved the social security prolem, but created another one of equal dimension. The debate would then be shifted to income tax rates and the level of benefits in that inevitable non-spcial security welfare program.

    My proposal, I think, better addresses the problem because it attempts to address both the (adequate) benefit and the contribution issue in one program. What I am looking for is a formula that will address the equities of the inter-generation problem and ensure that the system is more or less in an on-going “correction mode”. Of course, this proposal is not perfect–one still needs to worry about those IOU’s to the trust fund actually being paid.

  18. comment number 18 by: SteveinCH

    Nah,

    Means testing is a better solution. If the concern is really avoiding people sleeping under bridges or eating dog food, the current system has more than enough revenue to accomplish this task.

  19. comment number 19 by: Gipper

    vivian,

    People who don’t contribute enough to retire, must continue working or rely upon outside aid. It defies common sense to believe that the payouts to SS recipients will be adjusted according to actuarial principles to maintain solvency. Instead, we must make a clean break from defined benefit plans and convert to defined contributions. You get what you earned. Isn’t that a sound principle?

    That isn’t a mere “cosmetic” solution to the fiscal problem. A defined benefit program means that you know exactly what is owed and when.

    I’m amazed how some on the left cannot tolerate an open welfare program. They prefer to bury the redistributive effects of programs so that they’re hidden from the voters. Of course, that has been the genius of the Democrat’s 2 signature entitlement programs: Medicare and SS. They are also the 2 programs that threaten our fiscal solvency. Political Genius. Fiscal Ruin.

  20. comment number 20 by: Vivian Darkbloom

    Gipper,

    “People who don’t contribute enough to retire, must continue working or rely upon outside aid.”

    I don’t have any problem with a system under which people who don’t contribute enough to retire have to work longer. That is indeed a sound principle. Fundamentally, I agree that in order for the system to work (and other systems, such as health care) there needs to be some (i.e., more) personal accountability, that is, an awareness of the connection between actions and consequences. However, I also think it defies political reality (and to some lesser extent my own very pragmatic concept of “fairness”) to think that the system is going to be changed such that one only “gets what you earned”. I’m fairly conservative according to most standards, but I’m not against income redistribution so long as it is tempered by strong safeguards requiring individual responsiblity.

    As to relying on “outside aid”, I think that was precisely my point. If you eliminate the redistributive function of social security, you will need to create another redistribution mechanism upon which this necessary “outside aid” will be pushed. That’s just reality, and dare I say common sense. Perhaps there is a better way outside social security to make this redistribution more transparent (a good thing), but perhaps there is a method by which social security can retain its re- distribution function, albeit in a more transparent fashion. Either way is ok with me, so long as it is done efficiently and transparently, but what I’m most concerned about here is solvency.

    “It defies common sense to believe that the payouts to SS recipients will be adjusted according to actuarial principles to maintain solvency.”

    Please explain why this “defies common sense”. Isn’t this more or less what is required today in private sector plans? The problems that I am trying to address are the same ones you seem concerned about. First, by introducing a mechanism under which on-gong (annual) adjustments are mandated and shared by both current contributors and recipients, everyone has “skin in the game”. If you want to raise public awareness (a theme in a more recent thread) this is one very good way to do so. It not only raises awareness, but also shared accountability. (For the same reasons, I think everyone should pay at least some income tax). Second, such a self-adjusting system eliminates the need for infrequent adjustments that are made only as a result of political brinkmanship which is the historical and current experience. Having annual adjustments means that the solvency of the system is continuously a matter of public awareness. Third, such a system would spread the required adjustments more gradually eliminating more abrupt shocks to the economy and labor market. Fourth, such a system provides greater predictability both respect to contributions and benefits, which currently are subject to too many political uncertainties.

    I don’t think this “defies common sense”. Rather, I think it demonstrates at least some sense of sound judgement.

  21. comment number 21 by: Gipper

    Vivian,

    I’m not against all redistribution. I just want it to be explicit in a program, and not buried in something that purports to be a retirmenet plan.

    The reason your actuarial adjust plan defies common senes is because we have evidence it doesn’t work today - state, municipal, and school district public pension plans are seriously underfunded because politicians find it easy to win votes by promising higher benefits that future officeholders will have to grapple with.

  22. comment number 22 by: Vivian Darkbloom

    No problem with your first sentence, Gipper, but the second paragraph is not at all responsive, much less relevant to this discussion.

    State and local pension plans are largely defined benefit plans, funded almost solely by government, and often based on income during the highest years of income (the latter subject to the most obvious manipulation). There is no re-distribution among plan members (only from taxpayers to those members). Obviously, the assumptions regarding rates of return and the accounting for these plans has been terribly inaccurate and misleading. However, what in the heck does this have to do with social security or anything I have proposed? Defies common sense? Gipper, you can do better than this, I think.

  23. comment number 23 by: Gipper

    Vivian,

    Definitely defies common sense. The weakness of your plan is that you expect federal politicians to rely on the advice on actuaries, when their state-level counterparts don’t do so today. And unlike SS, state-funded plans actually have funds invested in marketable securities, not just future taxpayer promises to pay. So even with all those advantages, state funded plans are still a mess!

    The reason is that politicians won’t submit to actuaries! They’ll submit to the employee union, or the AARP complaints against lowering benefits to meet actuarial requirements in any given year.

    The perverse incentives of our electoral system means that we should NEVER have open-ended defined benefit plans. Your plan doesn’t attack the fundamental root of the evil.

  24. comment number 24 by: Arne

    Gipper,

    In my calculations, I explicitly took care of inflation, by converting everything to 1993 dollars. I believe the correct term for the contribution of the time value of money for a program that spends close to 100 percent of what it takes in is close to zero, but I am happy to see your alternative formulation.

    I was asked for the calculations, so I supplied them, but the point is that a system whereby each generation pays to support the one before it in retirement actually does work. It requires adjustments as lifespans change, but it can go on forever.